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When public becomes tax gatherer
March, 20th 2017

Till a few years ago, the requirement to deduct tax at source applied only to companies, partnership firms, individuals or Hindu Undivided Families (HUFs) carrying on a business or a profession, and that too a business or a profession of a sufficiently high quantum requiring a tax audit. Till 2013, other individuals carrying on a small business or not carrying on any business at all were required to deduct tax at source only if they were paying any income to a non-resident, such as for purchase of property from a non-resident. From June 2013 onwards, such individuals are also required to deduct tax at source from payments being made for purchase of immovable property of more than Rs50 lakh from persons resident in India. In this year’s Budget, the responsibility to deduct tax at source by such individuals is being further extended from 1 June 2017, if payment of rent being made by them exceeds Rs50,000 per month or part thereof.

This requirement to deduct tax at source applies to all individuals and HUFs, other than those liable to tax audit (for whom there is a separate provision requiring deduction of tax at source from rent exceeding Rs1.8 lakh per annum). The tax is required to be deducted at source if the amount of rent exceeds Rs50,000 per month or part thereof. The tax deduction is required to be made only once in a year—during the last month of the year or the last month of tenancy at the rate of 5% of such rent. If the house owner does not have or has not provided a Permanent Account Number (PAN), tax is required to be deducted at the rate of 20% of the rent. However, in such a case, the deduction would be restricted to the actual rent being paid for the last month of the year or the last month of tenancy.

To illustrate this, consider a situation where a salaried employee takes a residential house on a monthly rent of Rs60,000 from June 2017. He is required to deduct tax of Rs30,000 (5% of 10 months’ rent of Rs6 lakh) from the rent of Rs60,000 payable for March 2018. If the house owner does not provide her PAN, then the tax required to be deducted in March 2018 would have been 20% of Rs6 lakh, i.e., Rs1.2 lakh, but would be restricted to Rs60,000.

This requirement to deduct tax at source does not apply only to monthly tenancies or leave and licence arrangements, but would also to hiring halls or grounds for private or business functions such as weddings or parties, even if the rent is only for a day, and the rent payable exceeds Rs50,000 in a month.

Often, no separate charge is levied for such halls and only the charges for meals are levied. In such cases, as no rent is being paid, no tax is required to be deducted at source. Tax would again not be required to be deducted at source from payments being made for food or for decoration. Similarly, if one books rooms in a hotel where the total charges in a particular month exceed Rs50,000, tax will be required to be deducted at source from the room charges. In other months, if the room charges are less than Rs50,000, no tax will be deducted at source from the room charges payable for those months, even though tax may be deducted at source from room payments in a particular month.

The deduction would be only from the actual amount of rent. No tax is required to be deducted at source on the service tax amount, which is charged on the rent.

For payment of such tax deducted at source, one need not apply for a tax deduction account number or file a separate return. Just as in the case of tax deduction from payments for acquisition of immovable property, the payment of such tax and filing of the return would have to be done online simultaneously. However, past experience shows that it is quite challenging for a person who does not understand the technicalities of the tax law.

Therefore, the new provisions would place an additional burden of compliance on the common man. It is unfortunate that the general public is now gradually being converted to tax gatherers, purely on account of the incompetence of the tax authorities in identifying income earners and collecting taxes from them.

Looking at the trend, one only hopes that the day will not come when every person will have to deduct tax at source from all payments being made by him or her.

Perhaps, no other country in the world has such extensive tax deduction requirements on as many varieties of payments as India has. And in the same breath, we talk about making life easier for the common man or for businesses. Is it not time to really walk the talk and revisit some of the tax deduction requirements, eliminating those which are burdensome and where tax collections are not significant?

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